A Fearsome Loss!

After the market closed today (Monday), I saw on my news feed that Verifone Systems (PAY) had agreed to be acquired at a huge premium to its closing price, about 50% higher than the market. That’s not especially interesting news to anyone that doesn’t have a position in the stock, but I do. And it’s a short position. And that, as you might guess, is not a good thing.

I am sharing this bit of bad news as an object lesson in risk management, however. Because after I found this out, I asked myself the following questions and gave myself the following answers:

(1) Is the size of the position appropriate for the portfolio overall? Yes, it represents only about 1% of the entire portfolio.

(2) Was there anything about the behavior of the stock before this announcement that should have warned you to get out? No. The stop was in place at all times, and because the parties involved were doing a good job at keeping it secret (which is what they’re supposed to do), the market didn’t react until after it was official.

(3) Was the basis of the trade, based on the chart, logical and sound? Yes, it was. Indeed, at the market’s close today, the chart looked rock solid.

Bad surprises like this happen from time to time. So do good surprises. Don’t get me wrong, this news stinks, but it isn’t devastating. I’ll take the loss, I’ll delete the symbol from my watch list, and I’ll move on.

The point I’m trying to make is that you should never let one piece of surprise news impact you in such a way that it’s ruinous. I’ve never, ever had a stock move against me this much before – – maybe 15 or 20% once in a blue moon – – so 50% is kind of a “10-sigma”: event for me, but……..I’ll be OK.